Case Summary (G.R. No. 76573)
Undisputed Facts
• Marubeni Japan held direct equity in Atlantic, Gulf & Pacific Co. of Manila (AG&P).
• In the first and third quarters of 1981, AG&P declared cash dividends of ₱849,720 per quarter to Marubeni Japan.
• AG&P withheld 10% final dividend tax (₱84,972) and 15% branch profit remittance tax (₱114,712.20) on each quarterly payment.
• Net amounts (₱650,035.80 per quarter) were remitted directly to Marubeni’s Tokyo head office.
Dividend Withholding and Remittance
• April 20, 1981: AG&P remitted ₱84,972 (10% tax) and ₱114,712.20 (15% tax) for Q1 to the BIR.
• August 4, 1981: Similar remittance made for Q3.
• Total branch profit remittance tax paid: ₱229,424.40.
BIR Ruling on Branch Profit Remittance Tax
By Revenue Ruling No. 157-81 (Jan. 29, 1981), Acting Commissioner ruled that dividends received by Marubeni were not “effectively connected” with its Philippine business and thus not subject to the 15% branch profit remittance tax under Section 24(b)(2) of the Tax Code.
Claim for Refund
On September 21, 1981, Marubeni, through counsel, filed for refund or tax credit of ₱229,424.40, representing the 15% tax erroneously withheld on its dividends.
Administrative Denial by the Commissioner
June 14, 1982: The Commissioner denied the claim, holding that withholding of 10% plus 15% equaled 25%, which matched the maximum withholding rate under Article 10(2)(b) of the 1980 Philippines–Japan Treaty, thereby offsetting any refund.
Court of Tax Appeals’ Decision
February 12, 1986: The CTA affirmed the denial, reasoning that AG&P’s dividends were taxable income of Marubeni Japan, a nonresident stockholder, and that the combined 25% tax complied with treaty limits.
Contentions on Corporate Residency and Applicable Tax Rate
Petitioner’s Argument: Under the principal–agent theory, its Manila branch and Tokyo head office form one entity, making it a resident foreign corporation entitled to the 10% final tax on intercorporate dividends (Section 24(c)(1)).
Respondents’ Position: For dividends paid directly to Tokyo, Marubeni Japan acted independently of its branch and is therefore a nonresident corporation subject to withholding under Section 24(b)(1), with treaty relief limiting tax to 25%.
Interpretation of the Tax Treaty’s Dividend Provisions
Article 10(2)(b) of the Treaty caps withholding on dividends paid to a beneficial owner in the other contracting state at 25% of gross dividends but does not mandate imposition of that rate if domestic law provides a lower rate.
Application of Section 24(b)(1)(iii) of the Tax Code
As a nonresident receiving dividends from a domestic corporation, Marubeni is generally subject to 35% of gross Philippine‐source income but may pay a reduced 15% on dividends if its home jurisdiction grants a tax credit of at least 20% (the difference between 35% and 15%).
Com
Case Syllabus (G.R. No. 76573)
Procedural History
- Petitioner Marubeni Corporation, a Japanese foreign corporation with a licensed Philippine branch, sought refund or tax credit of ₱229,424.40 for alleged overpayment of branch profit remittance tax.
- The Bureau of Internal Revenue (BIR) denied the claim on June 14, 1982, asserting that the total 25% withholding (10% dividend tax + 15% remittance tax) offset the treaty rate under the PH–Japan Tax Convention.
- Petitioner appealed to the Court of Tax Appeals (CTA), which, in its February 12, 1986 decision, affirmed the BIR denial.
- Petitioner filed a motion for reconsideration, denied November 17, 1986; notice received November 26, 1986.
- Petitioner perfected its appeal to the Supreme Court within the 30-day period prescribed by R.A. No. 1125.
Facts
- Marubeni Corporation of Japan holds equity shares in Atlantic Gulf & Pacific Co. of Manila (AG&P).
- For Q1 and Q3 1981, AG&P declared cash dividends of ₱849,720 each, withholding 10% final dividend tax (₱84,972) and 15% branch profit remittance tax (₱114,712.20) before remitting directly to Marubeni’s Tokyo head office.
- Total dividends paid: ₱1,699,440.00; total 10% tax withheld: ₱169,944.00; total 15% tax withheld: ₱229,424.40; net remittance: ₱1,300,071.60.
- Petitioner asked the BIR in January 1981 whether its dividends from AG&P were “effectively connected” to its Philippine business and thus subject to 15% remittance tax. The Acting Commissioner ruled they were not.
- In September 1981, petitioner formally claimed refund/credit of ₱229,424.40 for erroneously paid remittance tax.
- BIR countered that dividends were subject to 25% withholding under Article 10(2)(b) of the 1980 PH–Japan Tax Treaty; since 10% + 15% = 25%, no refund remained.
- CTA upheld the BIR, treating the dividends as income of the Japanese head office and not of the Philippine branch.
Issue
- Are the dividends received by Marubeni Corporation, Japan from AG&P subject to:
• 15% branch profit remittance tax under Section 24(b)